Buying your first car is one of life’s major milestones. Unless you have enough money to pay for the car all at once, chances are you’ll need a car loan to help finance your purchase. The combination of a large financial commitment, a huge choice in the market, and complex financial terms can make the car-buying process quite intimidating for first-time buyers. Here’s how you can increase your chances of getting approval for your first car loan:
Determine Your Affordability
The first step to buying a car is determining how much you can comfortably afford to spend on a car. You’ll need to calculate your disposable income, which is total income minus all living expenses. This gives you an idea of how much is left over for you to spend on loan repayments. You can have this breakdown when you submit your application for the bank to assess and confirm that you can indeed afford car installments.
Extras Aren’t Optional
Affordability isn’t just about monthly repayments. There are several other costs associated with owning a car that you have to account for, including auto insurance, maintenance, fuel, and other unexpected expenses that may crop up like repair costs. All these form part of the costs of vehicle ownership and should be included in your budget when you submit your application. If your budget leaves room for these extras, then you’ll definitely improve your chances of approval.
Shop Around
There are several different loan products and options out there. You want to compare car finance offers from multiple lenders to ensure you are getting the best deal possible. Avoid focusing only on the affordability of the monthly payments, but rather on the overall cost of the vehicle. You might be tempted to apply for several loans to see if you gain approval. Well, pre-approval lets you know exactly how much a lender is willing to lend and strengthens your negotiating power at the dealership; however, every time you get rejected, it shows up on your credit history, which makes it difficult to get a loan later on.
Have a Down Payment or Trade-In
Money down shows the lender that you are committed to the deal, which makes it easy to get approval for a car loan. It also reduces the loan amount, which in turn lowers monthly installments and saves you a lot in interest charges over time. This can be done by making a down payment, trading in your current vehicle, or both. A down payment is the upfront cash you give to the lender to help cover a portion of the total cost of the vehicle. A trade-in, on the other hand, is offering a vehicle with value to go towards covering part of the car’s total cost. A trade-in is convenient but not acceptable by all lenders; plus, you won’t get as much as you would selling it to a private party.
Clear as Much Debt as Possible
Paying off existing debt increases your disposable income, which goes a long way to gaining approval. If you think you don’t have any debts, think again. Utility and credit card companies will record defaults or late payments even if you’ve paid back. You should check your credit history just to be sure. Most people buying their first car are young and probably with no credit history. In that case, take time to build up a good credit history, which is typically the biggest factor in determining whether you’ll get approved or not.